Managing Working Capital: Liquidity

To grow a construction business, you need to win plenty of good work (obviously), and you need to execute it well. But even a full backlog and flawless execution won’t save you if the cash runs out first. Every new job means paying for labor, materials, and equipment before the customer pays, often with retainage held back until the end. Take on too much too fast, and you can find yourself unable to make payroll. You can also negatively impact your surety bonding capacity. Follow these best practices for managing working capital, protecting liquidity, and building surety bonding capacity.

You’re financing the job before you’re paid

In construction, winning more work tends to drain cash. In most industries, the customer pays and then the work happens. Construction tends to run the other way. At For Construction Pros, Nathan Mor, Director of Settlement Operations at Coastal Debt Resolve, points out that contractors are often expected to essentially bankroll the very projects they’re building.

Payroll, materials, equipment rentals, and insurance all come due before the first check arrives. Mor notes that payment terms commonly run 30 to 90 days, and the clock often starts when an invoice is approved, not when it’s submitted. Retainage then holds back another 5% to 10% of the contract value until substantial or final completion.

The effect, in Mor’s view, is that the contractor becomes an interest-free lender to the project. And every delay, whether a slow approval, a disputed change order, a failed inspection, or a late delivery, stretches that loan a little longer.

When winning work becomes the problem

It’s natural to assume that contractors fail because they can’t find enough work. Mor argues the opposite is often true. Landing several projects at once means paying for crews, materials, equipment, and subcontractors right away, while the money from jobs you’re finishing up may still be weeks or months out.

The result is a company that looks like it’s thriving on paper but can’t cover this week’s bills. Mor has watched contractors with record backlogs slide into financial distress because collections couldn’t keep up with obligations. His summary is hard to argue with: “Profitability does not pay Friday’s payroll. Cash does.”

Even with sound work, and solid profit margins, timing can present real problems–and quick “fixes” can further exacerbate the challenges. When payroll is due Friday and a big receivable is still sitting in a GC’s approval queue, the fastest money starts to look like the best money. That’s often a merchant cash advance (MCA) or a similar short-term product.

MCAs typically pull repayments daily or weekly, straight from your operating account. Mor warns that for contractors working on 5% to 10% margins, those withdrawals can wipe out much or all of a project’s expected profit. He also sees a common cycle: one advance to cover a temporary gap, then a second to keep up with payments on the first.

Regulators have been watching this market, too. The Federal Trade Commission has gone after MCA providers accused of misleading small businesses about what they’d receive and repay, and of seizing assets through confessions of judgment. In one case, a federal court ordered an MCA company owner to pay $20.3 million and banned him from the industry. None of this means every advance is predatory, but it’s a good reason to read the contract closely and to arrange better options before you need them.

Know your working capital number

Working capital is your current assets (cash, receivables, materials on hand) minus your current liabilities (accounts payable, accrued expenses, short-term debt). It tells you whether you can cover what you owe in the near term with what you already have.

In a recent post, What Counts? Key Financial Metrics, we drew on guidance from Claire Wilson of Siteline, published by the Construction Financial Management Association. Wilson makes the point plainly: “in construction, every job starts in a negative cash position.” That’s why working capital carries more weight for contractors than in most other industries.

Two companion numbers show where your working capital is heading:

• Net cash flow (cash in minus cash out over a period). A negative month early in a project is normal. A string of them is a warning.
• Days sales outstanding (DSO), the average time it takes to collect after you bill. Tracking DSO by customer shows you which GCs pay promptly and which ones are quietly financing their jobs with your money.

Four ways to protect your liquidity

Mor’s core advice is to plan for the gap instead of reacting to it. His recommendations, for protecting liquidity include:

1. Keep a rolling 13-week cash forecast. Map out payroll, material buys, expected collections, and debt payments using conservative assumptions, then update it every week. A shortfall you can see six weeks out is a problem you can solve. One you discover on Thursday is an emergency.
2. Negotiate the money terms, not just the price. Ask for mobilization payments, deposits on materials, and reduced retainage once key milestones are met. Each one shrinks the amount you have to float.
3. Line up a bank line of credit while things are good. A revolving line is far easier to get when your financials are strong, and it gives you a much cheaper cushion than emergency funding when a payment runs late.
4. Watch how much you depend on any one customer. If most of your receivables sit with one GC, one slow payer can stall your whole company. Spread your work where you can, and keep a close eye on receivables aging.

How does working capital affect bonding capacity?

Sureties treat working capital as one of the clearest signs that you can finish the work you bond, so it directly shapes your bonding limits.

A timing squeeze that drains the bank account shows up on financial statements—and those are what an underwriter reads when you apply for a surety line of credit or bid a larger job. Shrinking working capital can limit how much work you’re approved to bond, just when you’re trying to grow. Contractors who forecast cash, negotiate better terms, and keep a cushion qualify for higher bond limits and bigger jobs.

Looking to get more strategic about your growth plans? Colonial Surety Company’s bonding programs are built to grow with you, at a pace your cash can support:

• Newer to bonding? Start with the Hometown Bond Program. It offers credit-based underwriting for bonds up to $500,000 and prepares you to qualify for The Partnership Account®.
• Ready for larger jobs? The Partnership Account® for Contractors gives you:
  • A written surety line of credit of up to $20 million single and $40 million aggregate
  • Instant bid bonds, issued yourself using our powers of attorney
  • Faster, easier performance and payment bonds
  • A private dashboard showing your underwriting profile, financial data, and available bond capacity in real time, so you know whether a new job fits before you bid it

Find out where you stand. Pre-qualifying for The Partnership Account® for Contractors is free and comes with complimentary financial scores, so you can see how much bonding capacity your working capital supports. 

Get your path to growth started now, right here:

Bonding Programs at Colonial Surety Company.

In business since 1930, Colonial Surety Company is a leading direct seller and writer of surety bonds and insurance products across the USA. Colonial Surety Company is rated “A Excellent” by A.M. Best Company and U.S. Treasury listed. 

Frequently asked questions

What is working capital in construction?

Current assets (cash, receivables, materials on hand) minus current liabilities (payables, accrued expenses, short-term debt). It shows whether you can cover near-term bills with what you already have.

How do sureties evaluate working capital?

Underwriters review your financial statements to judge whether you have the liquidity to finish the work you bond. Stronger, more consistent working capital generally supports higher bonding limits.

Is a surety line of credit the same as a bank line of credit?

No. A bank line of credit lends you cash. A surety line of credit sets how much bonding a surety will extend to you, and it doesn’t fund payroll or materials. Most growing contractors benefit from having both.